Friday, August 17, 2007

Thousands of people will give you millions of advice on how to invest in the stock market and most of them are ready to swear by the advice of Benjamin Graham, or David Dodd. Some of them go for Peter Lynch's advice. Yet hardly any of us really follow that advice. Each of these gentlemen have always cautioned against things like day trading, futures and options play. Trading in their perspective is the sure fire way to make money, but sadly it's for your brokerage house.

While I may not be qualified to say much on the subject, yet there are tips that I picked up in the last 12 months of actively following the market's trend. And the major revelation has been that it's all a game in the short term. Real wealth building comes only in the long term.

The Sensex/Nifty are very narrow trends of just 30/50 stocks. They do not indicate the performance of the stocks that you hold in your portfolio. Always look at the stocks you own. But if you must track indices, track the broader CNX Midcap. Better still find out the market breadth, the ratio of advances (the number of stocks that rose in today's trade) vs. the declines (the number of stocks that fell).

Whenever you buy a stock write down why you are buying it. Even if it is a tip from someone, write it down. This helps in later analysis on what kind of reasons for buying a stock works and what doesn't. Also, always keep a small note of when you want to sell it, based either on a price and/or a event. And then sell it when that happens. Emotional attachment to a stock is the surefire way to go down. Avoid it!

I generally don't track the value of my full portfolio. That is bound to keep my heart doing high jumps. Instead I use other online portfolio trackers. Create a portfolio of the same shares that you actually own, but keep the share units down to 1 for each. This helps in showing you the percentage increase or decrease in your holding per share (not the full portfolio). Aside from hiding the absolute value of the portfolio, something which gives me the heartburn or leaps of joy, it also trains me to handle the future larger sums of money.

If you did not beat any of the top performing diversified mutual fund by any significant margin, then it makes no sense for you to actually put in that time and effort to select individual stocks from the secondary market. Instead let your ulip or mutual fund do that for you, while you spend your time either reading up on the capital markets or with friends and family.

If you are from an emerging market, focus on companies that geared towards reaping benefits from domestic consumption. After all, that constitutes the major definition of an emerging market - developing economy with high expectations of growth. This helps in cushioning to a certain extent on the worldwide events, although I must admit that when panic grips people they follow the herd and lose their own mind.

In the end, for the defensive investor the best bet is to follow what Graham said. A 50-50 portfolio divided between stocks and bonds. Peace of mind, nights of good sleep - things more necessary than the extra 1-2%.

For the aggressive investor, it all boils down to if you can weather the storm that might rise from time to time. After all, the question is not whether you gain or lose. Rather it is, if you are making a loss how many lessons have you learned, and when you are making a profit how much of a profit you have made.

Two cases come to my mind in this. The first one from 3 years back where accounting malpractices were reported against Global Trust Bank on a Saturday and when the markets opened on Monday, there were only sellers in the stock. It went down from Rs. 8 to Rs. 2 and later went down to 0. So a 100% percent loss to people who thought otherwise and held on to it. But there's the second case of recent accusation of cartelization against the cement industry in India. Due to this the prices of cement stocks dropped for 2 consecutive days before rising merrily beyond their previous highs.

Wednesday, August 15, 2007

I was visiting a newly married couple in the evening, and as usually happens the talk got around to the experiences of marital life. Those already experienced were advising on both sides and it was a very excited and spice filled discussion. While on the way back, I began reflecting on why a man would want to marry at all. What is it that a man could get out of marriage, that he could not get otherwise!

First and foremost, at least in the formative years of a marital life is someone who would share the marital bed and keep the man happy on that respect. After all, we men are all built to function that way. Sometimes I wonder if that is all that is there for all the men to do. I even had a discussion a long time back on this with a female friend of mine on this topic. She very frankly made it clear that had it not been that only men carry the million of invaders required to infuse life into the otherwise infertile egg, there would be no need for the creed of man, per se. And with all the accessories available today, she was not far from the truth.

Coming back to the topic, the second reason why a man would want to marry is for someone who would do the basic feeding, cooking, and housekeeping stuff. Men, I admit, are not socially geared to that role, although more are picking up the basics pretty good these days. But then again, you can always hire a maid for the same purpose.

Third reason, is for that yearning for constant companionship. Somebody who would take up the emotional side of man (yeah, men do have a emotional quotient), listen with a good year. Someone who is smart, intelligent and is able to engage the higher needs of existence. Preferably someone who can also handle the finances (but then you have portfolio managers for that). Again, for this a man can have very good female company that is totally platonic.

There is yet another reason why a man might want to marry. And that is for an offspring. For a child that a man can call his own. For a kid, for which the man can proudly say he has fathered. I think that is the most major reason, why a man would go to any lengths of time to actually search for such a potential wife. And for this, and for this alone, I could not find any counter. I am not able to see what alternative could potentially replace this need (let's leave aside those men that choose to live the life of a hermit out of the society).

After writing such a post, I still hope that someone out there is still ready to marry me sometime in the future, if not now.

====================================================================Someday, I would hopefully find such candid discussion from a woman. Would be interesting to know and assimilate. Men are supposed to be narcissistic chauvinist. I wonder what keeps the women from being so.

Sunday, August 12, 2007

This past week has been interesting in terms of the blog world, with me reading and subscribing to a lot of blogs. Some posts have been pretty interesting.

Is it trick or treat : The Economic Times' detailed analysis reveals that there may be greater cause for concern than reasons to celebrate in the current stock market volatility in the Indian markets.

Biofuel brews up higher German beer prices : Bad news for the beer lovers. If that is the case, then it won't be far when the rippling effect reaches us. But then I am ready to pay more for a cleaner environment.

Saturday, August 11, 2007

As you might have guessed by this time that I keep reading a lot of blogs, or at the least have subscribed to a lot of them and read those that interest me most. There are a few categories under which those blog feeds can be grouped.

Personal - This is the largest category I think in which people tend to discuss their personal dilemma, their hopes and aspirations, their lament and love. A couple of them are of brilliant expressive writing and I love to read them (i.e. whenever the author's grace this online world with their talents!). Most of them are from people I know personally.

Financial Markets - These are content based blogs, where there is good and bad advice on which stock, mutual fund or bond investment to bet on. Some of them give a very good overall picture and some tend to lean towards one or the other.

Personal Finance - Most of such blogs are American, very few from people in India. Well, I think if the consumerism in India keeps rising the way it is doing, it won't be far when we are also discussing issues like which debt to pay off first based on the cost of the debt, and what strategy to follow to do that. (But then there are people like me who can benefit by investing in companies involved in such operations!

Professional Domain and Work - These are mostly blogs on SCM, and/or blogs on my current area of technical work. Heavy duty stuff, not all of which makes sense and on which I break my head to understand.

Miscellaneous - General advice on career, life and related news.

Well, some blogs are a mishmash of things. Others portray a multitude of events on a single theme - this is what I like best. Being able to hold onto a philosophy in all walks of life, in all day-to-day activities. In all this meandering, I also leave comments on posts for discussions' sake and have managed to ruffle some feathers. There are yet others who find my posts and my comments interesting enough that I have to invited to private blogs and have readers writing to me through email, although that number is not very high

Anyways, what I wanted to do post a list of links to the good posts from what I have read over the last week. The recommendations are purely from my personal opinion. Hopefully you will be able to enjoy it!

Friday, August 10, 2007

For the uninitiated, CRR is Cash Reserve Ratio, the amount of money that a bank must maintain as deposit with the central bank of the country (which is Reserve Bank of India in the case of India), before it can lend out any to individuals or corporations or any other customer.

The observationEach time the central bank raises the CRR, inflation seemingly goes down.

How much money can banks lend??Suppose you were to deposit Rs. 100 in the bank tomorrow. And the CRR is 6%. The bank where you deposited your money will keep aside Rs. 6 for the central bank. So it can lend out the remaining Rs. 94. But that's not the end. The banks are further allowed to reason this way: If the borrower of Rs. 94 decides to give out the money to somebody, that somebody may deposit the amount with the bank. So the bank can lend out an extra Rs. 88.36 (Rs. 94 - 6% of Rs. 94). And if the second borrower gives it to another person who brings it back, the banks will obviously have more to lend.

Following the calculation, it can be seen that the amount of money that the bank will be able to lend out is the sum of a geometric progression whose ratio is 0.94 (when the CRR is 6%), and the starting amount is Rs. 100Rs. 100 + Rs. 94 + Rs. 88.36 + ... = Rs. 100 / (1 - 0.94) = Rs. 1666.67

Or put more plainly, the bank can lend 16.67 times the money you deposit into the bank. And they are legally allowed to think like that. All this time I kept wondering why banks keep getting rich! Also, the point to note that at each amount in the above sum, the bank has a debtor who carries the cost of borrowing and thereby the banks are safe (unless the people start to default on their loans).

Effect of change in CRR to the money supply situationFrom above, we can deduce that if the CRR is decreased to say 5% the amount of money that the banks can lend is increased to 20 times. While if the CRR is increased to say 10% the amount of money that the banks can lend is decreased to 10. Thus when the central bank feels that the banks will not be able to handle the credit scenario, that is there is too much money in the system, it will increase the CRR and vice-a-versa. Although the central bank does not do this always. Sometimes it tries to use money market instruments such as treasury bills, bonds, repo rates and reverse repo rates, etc.

Effect of change in CRR on the credit situation (where the inflation part fits in)Due to this increase in CRR, the ability of banks to lend money goes down. Now banks are also companies and they need to show profit for their business. So keep their profit up, they increase the lending rate which essentially decreases the availability of cheap loans. As the cost of loans go up, you and I tend to spend less on frivolous purchases or at the least try to keep them at the minimum. Thus demand of goods goes down in general. And as you know, the price of a good is driven by demand in a free market economy without price controls. So the prices go down. Consequently inflation goes down.

Effect on Stock Markets

If there is an increase in CRR, there are chances that the profitability of banks go down. Thus sensing this loss banking stocks may take a hit.

Parallel to this, the cost of loans that a company may have borrowed would go up. The higher the loan amount, the greater the hit on the bottom line growth of the company. With lesser anticipated profits, people may tend to sell of the stocks of the company with higher debt. This is one reason why corporations tend to prefer equity instead of debt.

ConclusionThe central bank cannot hope to increase the CRR infinitely because with that the consequent demand goes down, which in turn drive the prices into a downward spiral. This obviously leads to lesser profit and eventual losses for companies. To contain this, companies may reduce production, others may go out of business. Only the cash rich companies can afford to sit it out, or invest in newer technologies for more efficient production. In the extreme case, the market would become monopolistic. And you know who loses out in the long run. Keeping all of these factors and effects in the calculation, the central bank needs to decide its policy. No wonder, I don't envy the job of the RBI governor.

Monday, August 06, 2007

As happens when old school classmates meet, there was lot of discussion today between three of us going back to school days on lots of topics, ranging from the usual how-to-convince-the-parents of the wanting-to-be-significant-other to how boring/exciting our life has become depending on perspectives to which course of work/study to pursue to the science behind astrology.

Some interesting observations from the conversation:

Each human being is born at a different moment. Now from one moment to other the entropy of the universe changes, hence affects the life of the individual born at that moment. For example, the word lunatic has its root in lunar which means the moon. And as is obvious, the closer the moon to the earth during your birth the greater the chances that you are going to be loony.

The only science behind astrology is statistics. All that the so called astrologers have done is charted the sky formation of a select few heavenly bodies whose relative motion through the sky are repetitive over a certain period of time. And every time somebody asks for advice all they do is pullout their voluminous books, read up the charts and spill out the readings.

One thing I do concede to is that astrology does point out the potentiality but the actuality is unknown even to the sooth sayers. For some that may be blasphemy, but I do believe that nobody can predict their own future for the next second, leave alone tell about the life happenings of the other.

An interesting side event that happened as if to prove just the point.

As the three of us were walking back to my place, an Indica taxi braked pretty hard and sudden to avoid a huge crater in the main road. Most probably the driver was new to the route and did not know the presence of the crater before hand. Well, what followed next was the most comical thing to happen. A Scorpio which was behind the Indica also braked hard and missed scratching the Indica's bumper by less than a whisker. But the Scorpio behind the first one braked also braked hard but managed to kiss the Scorpio in front, and that too pretty hard. And as if on cue a Maruti Esteem behind the second Scorpio banged into it very hard with the loudest "noise". The headlights broke and went strewing all over the place, the hood on the engine was ripped open and the front grill I am sure must have been smashed to a pulp.

While all this went on, the front car driver quietly turned his car and went along his way merrily. By the time the shock of the crash could wear off of the other three car drivers, the first car was no where to be seen. And you should have seen the look of shock and disbelief in the eyes of the last car driver. It was very obvious from his face that there could not have been a greater unrealistic event unfolding in front of his own eyes of which he was a part.

What I want to point out is who could have predicted this fateful crash beforehand. The last car owner would have to shell out more than Rs. 50,000 definitely. And that is a huge expense. I don't want anybody to predict the actual loss of the money but just the fact that you might be involved in such a situation.

Saturday, August 04, 2007

Yes, that's true even though I am an Indian. For the simple fact that every time I raise my hopes they are dashed harder than the waves of the ocean against the shoreline rocks. There are those that would be apt audience for the new Star Cricket channel. But alas, I am not one of those. For me the only team that plays is the Indian National Cricket team.

While I am not so qualified as to pass judgment on the recent developments in the world of cricket (formation of the Indian Cricket League), I do hope that things work in the favor of cricket the game. (To some I might sound contradictory, but I can't help it!)

Anyways, I was remembering a few interesting and eventful cricketing events that went on in real time matches between different nations while reading a forward. There's a huge list of such; I am putting up just a few.

The Prasad vs. Sohail Incident: Zero to Hero in 3 easy steps

Chasing India's score of 287-8, Pakistan got off to a flyer of a start with Aamir Sohail and Saeed Anwar tearing the Indian attack apart.

Aamir Sohail was completely bent on demolishing the Indian bowling to pieces charging down the track to faster bowlers. In this particular case he came down the ground, a good 4-5 steps and slashed the ball over the vacant off-side area. The ball disappeared into the fence in a flash. And what followed has since been etched in the memories of every cricket fan in the subcontinent.

Amir Sohail is no Miandad. But he tries to be, and fails miserably. Sohail after hitting the shot pointed his bat at the area where the ball had disappeared and then towards Prasad, apparently gesturing where he will send him. It's not everyday that you see a batsman sledging the bowler, and Sohail was about to learn just why.

Sohail attempted to repeat the shot (albeit with his feet stuck to the ground this time), made room and exposed his stumps, and his weakness, and in return lost his wicket and his face. As the wicket lay uprooted, Prasad returned the favor to Sohail, pointing to the pavilion this time.

McGrath Vs Brandes (I love this one!)

In a showdown of best pacers of two countries, Brandes made up for his complete absence of batting skills by displaying some great sense of humor and presence of mind.Aussie paceman Glenn McGrath was bowling to Zimbabwe number 11 Eddo Brandes - who was unable to get his bat anywhere near the ball. McGrath, frustrated that Brandes was still at the crease, wandered up during one particular over and inquired, "Why are you so fat?"Quick as a flash, Brandes replied, "Because every time I make love to your wife, she gives me a biscuit."Even the Aussie slip fielders were in hysterics.

Viv Richards vs. Greg Thomas

This incident took place during a county championship match between Glamorgan and Somerset. Glamorgan quickie Greg Thomas had beaten Viv Richards' bat a couple of times and informed the legendary West Indian ace, "It's red, round and weighs about five ounces, in case you were wondering."The very next ball was given the King Viv treatment and smashed out of the ground, into a river - at which point Richards pipped up, "Greg, you know what it looks like. Now go and find it."

Sachin Tendulkar vs. Abdul Qadir

The year was 1989, the little master had recently made his debut in Pakistan. Sachin not even old enough to get a driving license. Sachin Tendulkar was facing the best bowlers in the business. As the Pakistani crowds jeered and mocked Sachin holding out placards saying "Dudh pita bachha... ghar jaake dhoodh pi" (hey kiddo, go home and drink milk), Sachin sent the then young leg spinner Mustaq Ahmed hiding for cover (he had hit two sixes in one over.) The frustrated mentor of Mustaq Ahmed the legendary Abdul Qadir challenges Sachin saying "Bachhon ko kyon maar rahe ho? Hame bhi maar kar dikhaao." (Why are you hitting kids? Try and hit me.)Sachin was silent. Since then we all have come to know that he lets his bat do all the talking. Abdul Qadir had made a simple request and Sachin obliged, and how! Sachin hit 4 sixes in the over, making the spinner look the kid in the contest. The over read 6,0,4,6,6,6.

Ravi Shastri vs Mike Whitney

Its common knowledge that Indian's usually don't resort to sledging and the Aussies swear by it. In this rare occasion the tables had turned and it was the Aussies who were at the receiving end.Shastri hits the ball towards Mike Whitney (the 12th man in the game) and looks for a single. Whitney gets the ball in and says, "If you leave the crease I'll break your f***ing head!"Shastri, without batting an eyelid, "If you could bat as well as you can talk you wouldn't be the f***ing 12th man."

Merv Huges vs Hansie Cronje

Merv Huges was one of the greatest exponents of the fine "art" of sledging. Once during a tour game in South Africa Huges was bowling to Hansie Cronje. It was an especially flat wicket and Cronje was hitting Hughes for fours and sixes all over the place.After the umpteenth boundary, Hughes headed down the pitch, stood near Cronje, let out a fart and said, "Try hitting that for a six." It was five minutes before the guffawing stopped and play could resume.

And all this for just Rs. 2360. While not exactly cheap, I would say pretty decent for the fare that was served. Recommended for good food.

Out of all the items listed what I later resented spending on was the VAT 69. The problem was I was the only one who had that and that too 4 small ones at a total cost of Rs. 160. So at Rs. 640 it amounts to more than 27% of the bill. On the other hand I could have easily bought a full bottle of the good stuff at Rs. 860 (less than Rs. 900). Loss of good money and loss of good alcohol. I am so taken by the whole dining-out experience, that I tend to splurge on the few occasions that I actually do that. But most of the time it is sponsored by the company. Thank God for small mercies.

I have a small aim in life: Dine at the best restaurant in Paris. The full 17 course French classical menu. The whole dining experience, where you don't need to call on the waiter to be served the next course. Ahhh!!! I am getting high on the fantasy. The middle class Indian, who has heard and read lots but has experienced hardly anything. And aspires to the best!